Who owns the Tigers? Family plan is a matter of trust

Ilitch: A complex legacy

Mike Ilitch had a complex and sometimes testy
relationship with Detroit's historic preservation community,
which lauds him for his restoration of the Fox Theatre but
laments what it views as unnecessary levelings of old
buildings. Read
story.

It's a simple question with a somewhat complex answer: Who owns the Detroit Tigers?

Mike Ilitch, who bought the team for $85 million in 1992, died Feb. 10 at age 87. Because his widow, Marian Ilitch, owns MotorCity Casino Hotel, she is prohibited from inheriting the Tigers under Major League Baseball's rule that forbids team owners from having any stake in gambling operations.

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Marian Ilitch: Owns MotorCity Casino.

That complicates the ownership question for the Tigers in ways it doesn't for the Ilitch-owned Detroit Red Wings; the National Hockey League has no such prohibitions.

As part of estate and succession planning, the Tigers at some point were put into a trust, and Christopher Ilitch, the son of Mike and Marian who has run the team's day-to-day business operations since 2004, became the de facto owner and chief executive of the Tigers upon his father's death. He ultimately will decide the financial direction of the franchise, and the ownership change comes after the team's senior management had already signaled that the era of Mike Ilitch's free spending on players is over.

The actual owner of the team is the trust, however, and such trusts offer a way around MLB's gambling rules.

Details of the trust arrangement are private, and the family isn't commenting on its structure. The Ilitch family issued a succession-planning statement in May 2016 that confirmed Chris Ilitch would continue to oversee their holdings, but it didn't reveal specifics of ownership structures.

"All companies remain under Ilitch family ownership and in compliance with MLB regulations," Doug Kuiper, vice president of corporate communications for Ilitch Holdings Inc., said in a statement. Matt Bourne, MLB vice president of business public relations, deferred questions about the Tigers' ownership structure to the team and Ilitch family. A Tigers spokesman referred ownership questions to Kuiper.

"Chris has become increasingly involved in Major League Baseball activities, attending owners meetings, starting about the time that I became commissioner (in 2015)," Manfred was quoted by The Associated Press as saying. "He's been a positive force, obviously he has great sports background because of the hockey side, where he's been more involved historically. I think the Tigers are in really good hands."

The Ilitch family, whose fortune stems from ownership of the Little Caesars pizza chain, earned a reputation as sports owners willing to spend their way to championships.

Under their ownership, the Red Wings evolved from a moribund franchise to one of the NHL's elite clubs, winning four Stanley Cups. The Tigers struggled under Mike Ilitch for years until he hired Dave Dombrowski as team president and general manager — and opened his checkbook to spend more than $1.6 billion on players over the past decade in a spree that won a lot of games and a pair of American League pennants, but no World Series titles.

In 2015, Mike Ilitch fired Dombrowski and replaced him with Dombrowski's longtime lieutenant, Al Avila. After last season, the message from the Ilitches and Tigers was that payroll — which will top $200 million this year again — will begin to shrink to eventually get the team under MLB's luxury tax threshold ($197 million in 2018).

The Tigers in late 2016 let the rest of baseball know they were open to trading any player on the roster, including beloved but pricey starters such as pitcher Justin Verlander, but no deals emerged. But leaner payroll is the business strategy for the foreseeable future, along with a new focus on analytics, and Chris Ilitch will ultimately shape the team's direction.

The succession planning, if successful, should mean the family's financial resources don't get tied up in a massive inheritance tax battle — something that has forced other families to sell their teams.

Teams and trusts

A Crain's examination of public records in 2015 confirmed that Mike Ilitch had put the Tigers and other assets into trusts, a common practice that can shield heirs from federal estate tax bills that can run into the hundreds of millions of dollars for pro sports franchises. Ilitch has used the value of his sports assets as collateral for various business moves related to the teams, such as refinancing the private debt on Comerica Park, according to financing statements filed with the Michigan Secretary of State.

How the trust and estate planning has been specifically arranged to shield Ilitch's heirs from a massive estate tax or gift tax bill is unknown.

"A trust is its own legal entity," said George Malis, managing partner with Detroit-based Abbott Nicholson PC and a specialist in estate planning. "If shares of the Tigers are owned by the trust, the trust continues to own them (after Mike Ilitch's death). It now falls into Chris' hands to manages the trust assets."

Spouses are exempt from estate taxes, but children are not.

While the trust's structure is unknown, Malis said it's possible that Marian Ilitch could be named the beneficiary of the trust (and receive income from the trust) while Chris Ilitch is the controlling trustee. MLB allows such arrangements because its gambling prohibition applies to a trust's controlling trustee, not its beneficiary.

Some team owners, such as Jerry Buss of the National Basketball Association's Los Angeles Lakers, purchased insurance policies intended to pay off estate taxes so that heirs wouldn't struggle with tax bills — which sometimes can force a team sale. Estate tax bills from the Internal Revenue Service fueled the sale of the National Football League's Miami Dolphins in 1993 and St. Louis Rams in 2008. The Lerner family had to sell 40 percent of its stake in credit card giant MBNA to pay its estate tax bill after Cleveland Browns owner Al Lerner died in 2002.

If the Tigers were entrusted a long time ago, that freezes the value under federal gift tax law at the time the team was put into trust, Malis said. That's one way to reduce the eventual tax bill because sports team values have been skyrocketing because of enormous local and national TV rights deals and other revenue streams. Forbes most recently valued the Tigers at $1.15 billion.

Best laid plans

Even when an estate is thought to be well prepared, plans can unravel when a team owner dies.

After Bloomfield Hills multibillionaire and Detroit Pistons owner William Davidson died in 2009 at age 86, his widow assumed ownership of the team. Davidson had wanted the Pistons to remain in his family, but Karen Davidson decided she didn't want to own a sports team and sold it and other assets in 2011 for $325 million to Tom Gores.

Additionally, the Davidson estate was hit in May 2013 by the IRS with a $2.7 billion tax bill, which was settled for $457 million — in addition to $168 million in estate taxes and $82 million in gift taxes already paid. The estate sued Deloitte Tax LLP, which had crafted Davidson's estate plan, in what was ultimately an unsuccessful bid to recover $500 million.

Malis said the Ilitches and their estate planners would have been keenly aware of the Davidson situation, and crafted succession to avoid repeating those problems.

Where problems arise

Tax attorneys say the value of assets within an estate is the classic battleground for the IRS and the heirs.

"You always run into the issue of valuation. That's always where there is some risk," Malis said in a 2015 interview with Crain's about estate taxes.

The clash over estates comes when the IRS and the family each put a value on a team and other assets for tax purposes. For example, when Minnesota Twins owner Carl Pohlad died in 2009 at age 93, his estate valued his stake in the MLB team — set up in a complex fashion — at $24 million. IRS auditors disagreed, and the estate was billed $293 million for the ownership value and penalties. Eventually, after a lawsuit by Pohlad's sons, the estate settled for $36 million in 2015, according to the Minneapolis Star Tribune.

Selling an asset eliminates the valuation fight, Malis said: "If you convert it into cash, there is no squabble." The Ilitches have said they have no plans to sell their teams.

"None of our businesses or teams are for sale. Careful planning has been done over many years by Mike and Marian Ilitch to ensure the Detroit Tigers, the Detroit Red Wings and our entire family of businesses remain under ongoing and long-term Ilitch ownership," Chris Ilitch, who is CEO and president of Ilitch Holdings, said in the family's 2015 succession planning statement.

The estate tax

It's easy to understand why sports team owners craft detailed succession plans: The current top federal estate tax rate is 40 percent, with an exemption for the first $5.49 million.

Some quick cocktail-napkin math: If the Tigers were theoretically valued at $1 billion, and $5.49 million was shaved off for the exemption, the tax bill would be 40 percent of the remaining value — $398 million.

Federal tax law stipulates that if an asset accounts for 35 percent or more of an estate's value, the tax bill can be spread over 14 years — a proviso intended to help families keep family businesses. Otherwise, it's due within nine months.

If shares of the Tigers were transferred directly to Chris Ilitch and any of his six siblings, a federal gift tax at the time of the transfer would have to have been paid. The gift tax rate also tops out at 40 percent, and the exemption is $5.49 million.

In addition to the use of trusts, if a team owner's death is expected to produce an onerous estate or gift tax bill, he or she can buy insurance to cover some or all of it. Or, because of their enormous wealth, they can simply pay the bill.

Mike and Marian Ilitch's net worth was estimated at $6.1 billion by Forbes.com on Friday.

Teams in trusts

Several elite professional sports teams are owned, or have been owned, by trusts.

The defending World Series champion Chicago Cubs are owned by a trust owned and run by the family of TD Ameritrade founder Joe Ricketts. The trust bought the team and Wrigley Field for $845 million in October 2009.

The Los Angeles Lakers are in a trust headed by Jeanie Buss, an arrangement created by her father, team owner and real estate investor Jerry Buss, who died in 2013.

The Boston Red Sox were owned by the JRY Trust from 1992-2002 after owner Jean Yawkey died.